Mike Veseth, the Wine Economist, on the global issues facing the wine industry

Mike Veseth looks at the challenges facing wine producers and retailers around the world

Mike Veseth is a specialist in globalisation who blogs as The Wine Economist. He is also professor emeritus of International Political Economy at the University of Puget Sound in Tacoma near Seattle. After reviewing his books Wine Wars and Extreme Wine for Harpers.co.uk Jerry Lockspeiser talks to him about what he sees as the key global business issues facing the wine industry.

GLOBAL TRENDS

In “Wine wars” you drew attention to the contrast between wine as mass consumption beverage and wine made by small scale independent terroir-driven producers . How do you see this evolving?

There are several market segments and I think that the segmentation is becoming an even stronger force.

Commodity wines and luxury wines are now very globalized for different reasons. The surge in bulk wine sales and the transportation technology to facilitate it affects commodity wine dramatically – more than half of all New World wine exports last year were bulk wine sales. Luxury wines are now part of the global branded goods luxury industry of which wine is only one part.

I am very interested in some of the middle segments such as the market for wines of origin, where terroir not just commercial brand is a factor in product differentiation. I think the pendulum is swinging back this way and I think that’s a good thing. One of the reasons that producers of wines of origin are nervous about the growth of bulk shipment is that they worry that they can easily lose control over that precious terroir factor.

Would the wine category benefit from having one or two dominant mega brands?

The degree of market concentration in wine is much lower than in beer or spirits, so we are a long way from the beer situation where a very small number of producers control much of the overall market. I think it is unlikely that a couple of megabrands could dominate the wine market and I would see this as a negative.

But let me say that if it would happen I am pretty sure that the market would adapt dynamically. This reaction is based on my analysis of some other industries that go through periods of consolidation followed by fragmentation. Consolidation reduces the number of suppliers and their large size leaves holes in the market that smaller producers rush in to fill.

In “Extreme Wine” you took readers on a journey to places and products they may not have come across before. Do you think the global wine landscape will change dramatically in the next 20 years or so, mirroring the change from a bi-polar to a multi-polar world?

I think this is already happening. I can buy wines from China and Korea here in the Seattle area (I’m trying my first Korean wine tonight!). I’m looking for a resurgence of wine in the Old Old World (Turkey, Romania, Georgia, etc.) which is also the New New World in the next few years.

You are a specialist in globalisation. What are its main effects on wine economics and are they largely positive or negative?

I wrote a book about this question in 2005 – it is called Globaloney – that included a chapter about global wine as well as fast food, Slow Food, the used clothing trade, basketball and soccer. Globaloney argued that globalisation has both positive and negative effects and that they balance out differently in different industries (globalisation reflects its terroir, I said then). This is true for wine and so the balance of costs and benefits is different in different countries and segments of the market.

THE AMERICAN MARKET

What are the main issues in the American wine industry at present?

The California drought has put water issues on everyone’s radar and profitability is always important, especially to growers of grapes for commodity wines who see greater potential profits in tree nuts and other crops.

I think people in other lines of business vastly overestimate the amount of money in wine. Wine is a difficult business. It is capital intensive, plagued by many risks and requires a long term view.

The US wine industry is still very young and many smaller wineries that started 30 years ago are now facing issues of generational transition. It is said that a record number of wineries are now quietly being shopped around. At the same time larger producers are seeking security by purchasing vineyards to lock in grape supplies.

What advice would you give to a wine company wanting to export to the US market?

Distribution is the key issue in the US market because it is crowded, competitive and highly fragmented by individual state regulatory regimes. I encourage wineries to identify a few key markets, establish close relationships with importers and distributors and to invest in building the market by making regular visits to promote the wines and meet key US players. It is a mistake to think you can penetrate the entire U.S. market or to assume that the wines will sell themselves (or the distributors will do it for you) once you have entered the market.

In the UK there is high profile concern about the negative effects of alcohol on health and law and order. Wine is not exempt from this. Are these issues high on the agenda in the US?

There is no “war against wine” in the US to the same extent as in Europe but perhaps that is because we are still recovering from Prohibition and there are many parts of the US with lingering anti-alcohol restrictions and attitudes. In other words, the baseline attitude in the US is more restrictive than in Europe and our general regulations reflect this.

In some areas the movement is actually in the opposite direction. I live in Washington State and the voters recently raised taxes on alcoholic beverages but expanded the range of retail shops that can sell spirits (they also voted to legalise the sale of marijuana, subject to heavy taxation).

Civil society groups are actively and constructively engaged in this issue on both sides. Mothers Against Drunk Driving (MADD) have a long history drawing attention to problems of alcohol abuse, for example, while Women for Winesense have been successful with educational initiatives that present the positive case for wine much as the Wine in Moderation group in Europe.

What is your perception of what US consumers want from wine? How much do US consumers understand what they are buying and how much do they care?

There is no “US wine consumer” only dozens of different and diverse consumer categories – typical for a New World wine country and not that different from the old World. The good news is that the segment of the market that is well informed and attuned to the details is larger than 10 years ago and growing quickly.

A number of factors are responsible for this. The rising popularity of wine tourism, both at home and abroad, is very important. So is the spread of wineries and winemaking throughout the country. I have tasted nice wines from places you might not expect such as Idaho, Colorado, Arizona, New Mexico, Michigan, Indiana, New York, New Jersey, Maryland and Virginia. You don’t think of Texas as wine country, but the demand for Texas wine currently outstrips their ability to grow the grapes they need to make it. Local wineries invite local interest and help build a more sophisticated consumer base.

It seems to me that US wine consumers are more open to trying new things than Europeans- new packaging, styles, flavours and so on. Why do you think this is?

The US consumer market is obviously very large and diverse. There is a large segment that is very traditional and resistant to change – they would hesitate to purchase a wine from an unfamiliar producer, region or country and would never think of buying wine with a screw cap.

But there are other market segments that are very open to change – perhaps because they are the first generation in their families to drink wine and therefore have fewer inherited prejudices.

Consumers in the US market are constantly presented with new products, new packages and new messages and perhaps they are open to new ideas in wine because they don’t see wine as being fundamentally different from other products and see innovations in wine as just another part of a dynamic consumer world.

Are communities that have not traditionally drunk wine beginning to do so?

Yes, and I see this in part as the influence of television – especially the Food Network – which has introduced millions of people in the US and around the world to culinary and lifestyle ideas that are easily stretched to include wine.

Are commercial wine brands a good or a bad thing?

I hate to sound wishy-washing, but commercial wine brands have both positive and negative effects. Consistent commercial quality wines satisfy many and introduce some consumers to wine who will someday move on to more interesting products.

The key is not to violate “Einstein’s Law.” Einstein said that everything should be as simple as possible … but no simpler. He was talking about scientific theories, of course, but the idea applies to products like wine. Commercial brands succeed by simplifying, which is fine so long as they do not go too far and violate Einstein’s Law by making wine so simple that it loses its essence.

WINE BUSINESS

Do you think wine economics is sufficiently understood by people working in the business?

I find that wine industry people know a great deal about their own businesses, but are looking for broader context to help expand their analysis. I try to provide that by bringing insights from other industries or other wine regions. John Maynard Keynes wrote that he hoped one day economists would be as useful as dentists in terms of their ability to solve routine practical problems. That’s my hope for wine economics.

Wine business people often say that their industry is special and unique. Do you agree? Or do you think this is an excuse for avoiding many issues and adopting lazy business practices?

The wine business is a business and while many of the institutional elements are quite specialised to wine, many of the business aspects are not really unique. I like to say that the wine business is not so special as my winery friends like to think but not so generic as my economist friends believe.

How do you see the power relationship between retailers and suppliers? If you could suggest one thing each of them should change to improve the relationship for mutual benefit what would it be?

Disintermediation (cutting out the middleman) is one of the most important recent trends in the wine industry and it certainly does shift power from those who control supply to those on the demand side. This is happening everywhere although it is perhaps most advanced in the UK market.

The conflict between the two sides is most heated in the commodity wine market segment. I think that as that market tier is increasingly undermined by the success of artisanal spirits, craft beers and ciders, both sides will realise that they need to be allies rather than enemies so that they can better succeed at higher price points. So I recommend that both sides take note of these common enemies and find ways to work together more effectively.

It is said that many wineries around the world are not financially viable as standalone businesses but are subsidised by the wealth of their owners. Do you have any insight into the scale of this in the USA or elsewhere?

I don’t have data on the Chateau Ego phenomenon, but it is clearly a serious trend in the New World. But let me say that while many newcomers are in it for lifestyle or social status, others become very seriously committed to wine and can bring many benefits. Not all the lifestyle winery investments are the same. I have trouble predicting which prospective investors will make a serious commitment and help the industry advance. There is something about wine that draws people in, isn’t there, and changes them, too. It’s fascinating.

Lastly I have to ask: Where do you sit on the spectrum of wine as alcoholic beverage on one end and soul, art and life on the other?

I’m not very interested in wine as just alcohol. I think of wine like food, something that is part of a healthy, happy civilized life and that is capable of being elevated to an art form. Wine is special because of its ability to connect people. As I like to say, water keeps people apart, wine brings us together.

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